Non-Convertible Bond @ 1.3% . . . Why Buy ?

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trajan

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About this "green bond" by Chinese state-backed Three Gorges Corp . . .

After finally having to call the Stock Exchange to determine it, I am informed that the Three Gorges bond "sold out" 2 weeks ago was non-convertible.

Why the hell would anyone buy a bond giving 1.3% p.a. over 7 years with a minimum order of €100,000 ?

Serious answers only please.
 
To get a return of 1.3%.

Given the ECB rate for large deposits is NEGATIVE, a govt backed bond at 1.3% appears good.
 
why indeed , the likes of coca cola , johnson and johnson , mc donalds

all pay in excess of 3% of a dividend , while not having zero risk , id take the wager that all three are still standing in seven years , you could even buy investment grade corporate bonds and do better
 
It is misleading to compare bonds and stocks on the basis of yield alone.

Bonds trade in the secondary market for more or less than their par value (i.e. they trade at a premium or discount to their face value). Because the coupon is fixed, a bond’s yield goes up when its price drops, and vice versa. Current yield is the amount of annual interest divided by a bond’s current price and yield to maturity factors in the difference between a bond’s current price and its face value at maturity.

When it comes to stocks, all three components in the equation - dividend, stock price and yield - are variable and a change in one component would automatically change the other two. So, a higher dividend amount would increase the current yield if the stock price remains the same and an increase in the stock price would reduce the yield if the dividend remains the same.
 
Because the coupon is fixed, a bond’s yield goes up when its price drops, and vice versa. Current yield is the amount of annual interest divided by a bond’s current price and yield to maturity factors in the difference between a bond’s current price and its face value at maturity.

Hold on there.
Coupon is normally expressed in terms of an interest rate, says Wikipedia.
Coupon is therefore fixed relative to the original (nominal) value.
The offer price going higher makes no difference to the yield of someone who already paid the original price.
It just affords them an exit margin.
Anyway - why would a secondary market raise the price for this bond ?
As Ravima suggests, it would only happen if some institutions (temporarily) rotten with money could find no better use for it than to bid on a stock currently yielding 1.3% and offer them a margin to exit.
So the bond market is a high-volume low-margin game at best.
I'm not sure that it is that certain, as de Moivre says.
All hangs on one's assessment of the liquidity state of the principal players in the market both now and in the future.
Bond market experts have this; the rest of us don't.

So as a private investor I think any high-volume & low-margin proposition like this should be seen like a poker raise.
The risk-calculated gains must at least equal the possible losses.
 
trajan said:
Anyway - why would a secondary market raise the price for this bond ?

As Ravima suggests, it would only happen if some institutions (temporarily) rotten with money could find no better use for it than to bid on a stock currently yielding 1.3% and offer them a margin to exit.
Click to expand...

If the effective yield available for comparable bonds (risk rating and maturity profile) falls below the coupon rate, the price should rise.

We're going through a largely unprecedented cycle of negative interest rates - just today the NTMA issued 5 year bonds at a negative yield. Investors bought the bonds knowing they will receive (marginally) less in return in 5 years time. Those investors are happy to do so, as it's the best risk adjusted return they can get right now.

trajan said:
So as a private investor I think any high-volume & low-margin proposition like this should be seen like a poker raise.
The risk-calculated gains must at least equal the possible losses.
Click to expand...

Risk is calculated into the price / return. In simple terms there are less variables that impact a bond price Vs a stock price, namely market interest rates for a sovereign backed bond. The bond market is closer to having perfect information as bonds are so comparable, so the market is more efficient and global, and highly liquid.

Stocks should have a higher return, as the investor is taking a higher risk, or betting on far more unknown variables. It's not correct to compare a 1.3% coupon bond to a stock yielding 1.3%.

Here's a good introduction article that explains some of the concepts better than I can http://www.investopedia.com/articles/basics/08/stocks-bonds-performance.asp
 
trajan said:
Because the coupon is fixed, a bond’s yield goes up when its price drops, and vice versa. Current yield is the amount of annual interest divided by a bond’s current price and yield to maturity factors in the difference between a bond’s current price and its face value at maturity.

Hold on there.
Coupon is normally expressed in terms of an interest rate, says Wikipedia.
Coupon is therefore fixed relative to the original (nominal) value.
The offer price going higher makes no difference to the yield of someone who already paid the original price.
It just affords them an exit margin.
Anyway - why would a secondary market raise the price for this bond ?
As Ravima suggests, it would only happen if some institutions (temporarily) rotten with money could find no better use for it than to bid on a stock currently yielding 1.3% and offer them a margin to exit.
So the bond market is a high-volume low-margin game at best.
I'm not sure that it is that certain, as de Moivre says.
All hangs on one's assessment of the liquidity state of the principal players in the market both now and in the future.
Bond market experts have this; the rest of us don't.

So as a private investor I think any high-volume & low-margin proposition like this should be seen like a poker raise.
The risk-calculated gains must at least equal the possible losses.
Click to expand...

Your post makes virtually no sense.

The bond is priced at 1.3% because it's A+/A1 rated paper from a company with 4x leverage, a 50% equity cushion and $80bn+ in total capital. And that's where the market prices it.
Why is the minimum set at €100k? Because it's a €650mm bond.
 
It's not correct to compare a 1.3% coupon bond to a stock yielding 1.3%.

It's not.
And I wasn't.
But rather comparing an opportunity for substantial capital growth as well as a modest dividend similar to that offered by the bond.

Which is why I'd have tried to buy Three Gorges Corp bonds if they were convertible.
But they weren't.
 
Your post makes virtually no sense.

Would you be happy if your pension manager only delivered 1.3% on your contribs ?
"Oh but your contribs are rock solid in Three Gorges Corp, Mr X", he cried - and you cosh him and walk out the door to find a new pension manager.
 
trajan said:
But rather comparing an opportunity for substantial capital growth as well as a modest dividend similar to that offered by the bond.
Click to expand...

I've already tried to explain why it is misleading to compare bonds and stocks on the basis of yield alone. Stocks are by some order of magnitude more risky (volatile) than bonds.

Put simply, you are comparing apples to oranges.
 
trajan said:
It's not correct to compare a 1.3% coupon bond to a stock yielding 1.3%.

It's not.
And I wasn't.
But rather comparing an opportunity for substantial capital growth as well as a modest dividend similar to that offered by the bond.

Which is why I'd have tried to buy Three Gorges Corp bonds if they were convertible.
But they weren't.
Click to expand...
You're ignoring the risk of massive capital losses!
You're not going to find A+ rated bonds, with sovereign guarantee, that are convertible.
 
You're ignoring the risk of massive capital losses!

And to some extent, so are you.
Even state-backed corporations like Three Gorges could - in extreme circumstances, e.g. flood/landslide, innovation, etc - be compelled to
default on their debtors . . .

But my main point is that such purchases are not really investments - they are just money-keeps.

I have an odd feeling we have a bond salesman hereabouts :D
 
trajan said:
Even state-backed corporations like Three Gorges could - in extreme circumstances, e.g. flood/landslide, innovation, etc - be compelled to
default on their debtors . . .
Click to expand...
Absolutely, and that's why there is a positive yield at all given that there are negative yields on less risky bonds. However, bondholders will take their hit a long time after shareholders in crisis events.

I currently have no involvement in bonds, either as a seller or investor, but I understand what they are which you clearly don't.
 
Sarenco said:
Stocks are by some order of magnitude more risky (volatile) than bonds.
Click to expand...

The text books define risk as volatility, usually quarterly volatility. However over most periods stocks out-perform bonds.

Investors should be more interested in the possibility of long term under performance. On that score stock are preferable to bonds. By any non-technical meaning of the word "risk" stocks are less risky than bonds.

Investors who are familiar with the technical meaning of risk, and know that bonds are riskier than stocks often unconsciously act as if that meant bonds have less chance of long term underperformance than stocks. They don't.
 
Cremeegg

I think you might be confusing (or at least conflating) risk with probability.

Equities are alway more risky than (investment grade) bonds (otherwise how do you explain the equity risk premium?). But the probability (based on the history of the last century) that stocks will outperform bonds over longer holding periods is certainly true - which I think is the point you are making. That is not to say stocks become less risky over time - they don't.
 
Sarenco said:
Equities are alway more risky than (investment grade) bonds (otherwise how do you explain the equity risk premium?).
Click to expand...

Not the case, they just have a different risk profile, that admittedly is not well understood. But get it wrong and you can easily loose as much on bonds as on equities and sometimes even more! The only safe strategy for most investors is to buy bounds with the intention of holding them to maturity.
 
Jim2007 said:
Not the case, they just have a different risk profile, that admittedly is not well understood.
Click to expand...

Sorry Jim but it is the case.

It is axiomatic that short term investment grade bonds are always less risky than equities. Always.

How else do you explain the concept of an equity risk premium?

If equities were somehow less risky than bonds can you explain why the global bond market is bigger than the global equity market? Do you really think that the majority of market participants are missing something obvious?

Are you really sure you understand how bonds work? Can you you explain why holding a bond to maturity makes it less risky?
 
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Sarenco said:
Cremeegg

I think you might be confusing (or at least conflating) risk with probability.

Equities are alway more risky than (investment grade) bonds (otherwise how do you explain the equity risk premium?). But the probability (based on the history of the last century) that stocks will outperform bonds over longer holding periods is certainly true - which I think is the point you are making. That is not to say stocks become less risky over time - they don't.
Click to expand...

I am not so much trying to explain equity risk premium as trying to question it.

Why is there an equity risk premium if the probability is that stocks will out perform bonds over a longer holding period.

To say that equities are more volatile on a quarterly basis seems to me an inadequate answer.
 
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